Dean Baker repeated yesterday the absurd claim which Keynesians are fond of repeating that, “We got out of the last Great Depression by spending lots of money on fighting World War II.” He obviously wasn’t around during that war, as my parents were, or he would know that World War II merely changed the form of depression from one where many people had no jobs to one where they had jobs but there were no goods to buy with the income they were making.
He would also know that we actually got out of that depression by rebuilding a world destroyed by war, and that we had no competition while doing it because we had bombed our competition into rubble. We also provided college educations for much of the generation which fought that war.
He goes on to say that, “the economy doesn't care what we spend money on, it responds in the same way.” Actually, that’s not even close to being true, because when the money winds up being spent on consumer goods manufactured in other economies, that spending merely increases the trade deficit and does essentially nothing for our economy. When we spend it on fighting wars in foreign countries it is money gone forever and we have nothing to show for it.
When, on the other hand, we spend it on building roads, bridges, water and sewer systems and energy production and transmission, we grow our economy, provide meaningful employment for our working class, and we still have the money in the form of infrastructure because we have invested the money instead of merely spent it. We have not, however, done anything meaningful in this arena in more than fifty years.
Hopefully that spending is done in a manner which reduces our impact on the planet, but that’s a different topic.
Dean Baker is an idiot, as are all economists by definition, because we cannot grow our economy from within like some sort of self licking ice cream cone, we can only do so from without by means of a positive trade balance as we did from the end of World War II until the 1970’s, and when we do spend money it matters very much how and on what we spend it.